Why Sanctions Don’t Stop Oil

Driving 120km/h in a 100km/h zone is against the law in Australia. Whilst it technically is breaking the law, it is a commonly accepted, calculated risk where the perpetrator assumes the punishment is unlikely or minor. This cost-benefit analysis follows the lines of China and Iran; China is increasing its imports of Iranian petroleum which “may demonstrate that Chinese-based buyers believe that the economic benefits of buying Iranian petroleum exceed the risks of U.S. sanctions for several reasons” (Elsea et al., 2024), from a report published on Congress.gov. The U.S. has spent decades using sanctions to choke Iran’s petroleum revenue, and the country’s ability to fund proxy militias. (Triebert et al., 2024) However, many members of Congress are increasingly concerned: Iran petroleum exports are reportedly reaching new heights, with petroleum and petrochemical sales generating as much as $70 billion in 2023 per an investigation by the Economist, (as of writing). (Elsea et al., 2024) China is only increasing its imports of Iranian petroleum despite U.S. sanctions. How?

Non-military: that’s the key word for today. Of the many types of economic sanctions (Embargoes, trade sanctions, capital controls, and more), they do exactly that; they are non-military penalties imposed “to influence or change another country’s policies or actions,” per Investopedia. (Radcliffe, 2019) For Iran, this is all designed to modify the conduct of Iran’s regime across multiple areas of concern; nuclear and ballistic missile programmes and proliferation, support for terrorism, regional destabilisation and human rights abuses. (European Parliament, 2025) Iran faces the most comprehensive set of sanctions that the US maintains on any country. More specifically, Iran has trade sanctions targeting its oil exports, and sanctioned Iranian banks, including Iran’s Central Bank (capital control). (Elsea et al., 2024) The sanction on Iran’s Central bank is capital control; a restriction on investment in Iran and broadly bar access to international capital markets. (Radcliffe, 2019) Sanctions are done to cut off buyers (from Iran’s oil), and reduce revenue to force political change. This doesn’t seem to be working.

What Do Economic Sanctions Do?

This is where the theory breaks down. Per Congress.gov (Elsea et al., 2024) Iranian petroleum is often sold below prevailing market prices, at a discount compared to Persian Gulf and price-capped Russian suppliers, “to entice foreign traders.” Iran is desperate; they are lowering prices, and rational buyers will respond to bargains regardless of politics. This is just incentives; it will always happen.
On the buyer side, “teapots” is the name of Chinese based buyers (refineries) or traders; small and semi-independent. Teapots are “both hard to uncover and not exposed to the U.S. financial system,” which only constrains the effectiveness of U.S. sanctions.
(Elsea et al., 2024) These buyers, or traders, reportedly utilise deceptive techniques, including relabeling Iranian origin petroleum and broadcasting fake tanker route information (“spoofing.”)
Together, the buyers, traders or just “teapots” are helping funnel tens of billions of dollars from these illicit oil sales into Iran’s economy and even into other parts of the world, per an investigation by the Economist. (The Economist, 2024) This huge, secret slush fund was used to fund Hamas’s attack on Israel a year ago, swarms of Russian drones in Ukraine and Iran’s own nuclear programme. (The Economist, 2024)

Why The Theory Breaks Down

Why Does The Discount Mechanism Always Win?

Firstly, since rational people make decisions considering costs and benefits, they respond to incentives. (Gans et al., 2021) Sanctions assume politics overrides economics; yet buyers are rational agents responding to incentives, not political actors. That is one reason the discount mechanism always wins, secondly is the discount which is simply the market’s response to friction; every barrier sanctions create, the price adjusts to compensate the buyer for taking the risk. A third reason is the U.S. may lack jurisdiction over a vessel, making options limited. (Elsea et al., 2024) Finally, the last is on secondary sanctions; as recently as April 2026, the U.S. has threatened secondary sanctions on buyers of Iranian oil, reports Reuters. (Holland & Psaledakis, 2026) “We have told countries that if you are buying Iranian oil, that if Iranian money is sitting in your banks, we are now willing to apply secondary sanctions,” U.S. Treasury Secretary Scott Bessent told reporters at the White House. Secondary sanctions aim to punish parties (e.g. teapots or Chinese banks) who trade with targets (Iran) who have been sanctioned. But obviously, as the “teapot” example shows, if buyers are small, opaque and outside the U.S. financial system, enforcement becomes nearly impossible.

Like the driver doing 120 in a 100 zone, China has calculated the risk and decided it’s worth it. Sanctions are a political tool, but economics doesn’t care about politics. As long as price signals exist and buyers are rational, the discount mechanism wins. The question is no longer whether sanctions on Iran are working. It’s whether they ever could.

So, Does Economics Always Win?

References

Caputo, M. (2026, April 14). Scoop: U.S. eases bank sanctions amid Venezuela’s economic woes. Axios. https://www.axios.com/2026/04/14/venezuela-bank-sanctions-protests-delcy-rodriguez

Department of Foreign Affairs and Trade. (n.d.). About sanctions. Australian Government Department of Foreign Affairs and Trade. https://www.dfat.gov.au/international-relations/security/sanctions/about-sanctions

Elsea, J., Rosen, L., & Thomas, C. (2024). Iran’s Petroleum Exports to China and U.S. Sanctions. Congress.gov. https://www.congress.gov/crs-product/IN12267

European Parliament. (2025). International sanctions on Iran. Europa. https://www.europarl.europa.eu/RegData/etudes/BRIE/2025/777928/EPRS_BRI(2025)777928_EN.pdf#:~:text=US%20sanctions%20on%20Iran%20(%20Islamic%20Republic,evolved%20into%20a%20complex%20regime%20since%201979.

Gans, J., King, S., Byford, M. C., & N Gregory Mankiw. (2021). Principles of microeconomics. Cengage Learning Australia.

Holland, S., & Psaledakis, D. (2026, April 15). US warns that buyers of Iranian oil could be hit with sanctions . Reuters. https://www.reuters.com/world/americas/us-targets-irans-oil-transportation-infrastructure-with-sanctions-2026-04-15/

OFFICE OF TERRORISM AND FINANCIAL INTELLIGENCE. (2020). 844 | Office of Foreign Assets Control. Office of Foreign Assets Control | U.S. Department of the Treasury. https://ofac.treasury.gov/faqs/844

Radcliffe, B. (2019). How Economic Sanctions Work. Investopedia. https://www.investopedia.com/articles/economics/10/economic-sanctions.asp

The Economist. (2024, October 17). Inside the secret oil trade that funds Iran’s wars. The Economist. https://www.economist.com/finance-and-economics/2024/10/17/inside-the-secret-oil-trade-that-funds-irans-wars

Triebert, C., Migliozzi, B., Bedi, N., & Cardia, A. (2024, February 16). The $2.8 Billion Hole in U.S. Sanctions on Iran. The New York Times. https://www.nytimes.com/interactive/2024/02/16/world/middleeast/iran-oil-tankers-sanctions.html